Commodity Trap - PowerPoint PPT Presentation

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Commodity Trap

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Rural communities are caught in commodity traps ... The Flea on the Dog Analogy... The flea thinks he has complete freedom and control over where he goes ... – PowerPoint PPT presentation

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Title: Commodity Trap


1
Commodity Trap
2
The Core Problem in Rural Communities
  • Rural communities are caught in commodity traps
  • The primary source of wealth in these communities
    is something thatby definition must be low cost

3
Local Economy 101
  • An economy is simply the act of trading with each
    other
  • We all specialize and we trade with other people
    who specialize
  • RVs made Elkhart IN
  • Gas made in Houston
  • Carpet made in Dalton GA
  • Finance in NYC

4
Local Economy 101
  • If we were to go out in the wide open spaces and
    start a new town, it would have to have some
    specialization that it could trade with the world

5
So we build a factory.
  • The jobs in this factory are primary jobs
  • Our products are exported out of town
  • Our products bring money into town

6
Local Economy 101
Primary Jobs
Residential
Local Businesses
Government
7
A Few Points to Note.
  • Primary (exporting) jobs determine the wealth of
    a community
  • Wealth flows down the local chain
  • Retail doesnt create wealth, it distributes it
  • Government and charities are at end of the chain

8
Lets Take a Look at Rural Economies
  • The export
  • natural resources
  • growing wheat is the specialization
  • The function of the town
  • shipping point for natural resources going out
  • distribution point for products coming in

9
The Problem Natural Resources are a Commodity
  • There is no way to differentiate commodities
  • Wheat in Nebraska is the same as wheat in Kansas
  • The only difference
  • is price
  • To get price down, you have to cut expenses

10
Why commodity pressures exist
My profit margin
Your profit margin
Your selling price
My selling price
My expenses
Your expense
11
Dropping my prices shifts sales to me..but
eliminates my profits
price
price
12
Unless I can reduce my expenses..
expense
expense
13
Then you have to reduce your prices.and drop
your expenses
expense
expense
14
We are in a race to the bottom
expense
expense
15
Loss of Primary Jobs
  • Cutting expenses often means replacing labor with
    machines
  • 1900 One family to farm a quarter section of
    wheat
  • 2005 One family can farm 30 quarters
  • For every family left in farming, 29 other
    families have left for other jobs

16
The Death of a Town
  • Farmers leaving means fewer primary jobs .

17
The Death of a Town
  • Fewer primary jobs means.
  • Fewer people to support local businesses, which
    leads to..

18
The Death of a Town
  • Fewer primary jobs means.
  • Fewer people to support local businesses, which
    leads to..
  • Fewer local business

19
The Death of a Town
  • Fewer primary jobs means.
  • Fewer people to support local businesses, which
    leads to..
  • Local business decline
  • The town starts to die

20
Commodity Traps
  • This whole series of events is called a commodity
    trap.
  • It works at the community level
  • It works at the individual level
  • It works at the company level
  • It works at the nation level
  • The core problem is that commodity industries
    must reduce expenses, including wages

21
Commodity pressures can be seen operating
everywhere
  • Wal-Mart
  • Not paying health benefits to employees
  • Contracting janitorial services to firms that
    hire Mexican labor

22
Corporate defaults on pensions
23
Pilots salariesairlines are a commodity
24
A Trap by any Other Name.
  • The name of the commodity changes in rural
    communities
  • Farming

25
A trap by any other name.
  • The name of the commodity changes in rural
    communities
  • Ranching

26
A trap by any other name.
  • The name of the commodity changes in rural
    communities
  • Logging

27
A trap by any other name.
  • The name of the commodity changes in rural
    communities
  • Fishing

28
A trap by any other name.
  • The name of the commodity changes in rural
    communities
  • Mining

29
A trap by any other name.
  • The name of the commodity changes in rural
    communities
  • Farming
  • Ranching
  • Timber
  • Fishing
  • Mining
  • but the trap doesnt

30
The Flea on the Dog Analogy
  • The flea thinks he has complete freedom and
    control over where he goes
  • But mostly he is going to go where the dog goes
  • He is caught in a system bigger than he can
    influence

31
People Caught in a System
  • People in small towns work hard, go to church,
    raise their kids, abide by the law
  • .and yet they end up in poverty
  • .. because the commodity trap is a system bigger
    than they can influence

32
Typical Community Reaction
  • Lets replace farming with industry
  • We are a low cost place to do business
  • Low wages
  • Low land prices
  • Low taxes
  • Advertise that fact and get a plant expansion
  • Offer incentive packages to boot

33
More Commodity Trap
  • The types of industry looking for low costs are
    commodity industries
  • Will stay as long as costs are low
  • Will move to Mexico or China if standard of
    living rises
  • The community trades commodity resources for
    commodity industry

34
Economic Gardening an entrepreneurial solution
  • Develop local entrepreneurs
  • Create a nurturing environment
  • People with roots in the community
  • Support innovation to keep exports from becoming
    a commodity
  • Public sectors role
  • Invest in community, not companies
  • Information, infrastructure, connections

35
The End
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